The biggest economic news item this week was today’s December employment report, which showed a larger than expected loss to close out a dismal 2009. The job losses posted in December represent another sobering reality check that conditions in the labor market are still weak. Businesses are still battling the slower economy and many are still reorganizing to remain competitive in the current environment, as evidenced by UPS’ recent announcement that it would be cutting its workforce by another 1,800 jobs. On the housing front, the National Association of Realtors reported the first drop in its pending home sales index in the last 10 months while the Labor Department reported that jobless claims edged up slightly over the past week.

Talk from some Fed officials has also started to sound slightly more hawkish in regards to interest rates, but there is no broad expectation that they will be moving them higher any time soon. With rising oil prices and mounting government debt from all the bailouts and stimulus plans, the Fed faces the difficult balancing act of trying to control inflation while ensuring the economy is stable enough to stand on its own without the fire hose of Fed money. Recent trading trends have suggested that the market believes better times lie ahead but the Fed likely believes that if the easy money is pulled too soon, it could lead to a stalled recovery or a dip back into recessionary conditions.

The Economy
Although data revisions showed the U.S. economy adding jobs in November for the first time since January 2008, payrolls posted a steeper than expected drop for the month of December. Total non-farm payrolls fell by a seasonally-adjusted 85,000 jobs following an 8,000 job gain in November. The U.S. economy shed a total of 4.2 million jobs for 2009. The unemployment rate remained flat from the previous month at 10.0%. Currently, non-seasonally adjusted total non-farm employment shows a figure of 131,821,000, a loss of 3.01% from December 2008.

Consumer confidence increased for the second straight month in December. The consumer confidence index increased to a reading of 52.9 in December from an upwardly revised November figure of 50.6. The consumer confidence index is also up from the same year-ago period when it recorded a reading of 38.6. The present situation index declined from the previous month to a reading of 18.8 from 21.2 last month. The present situation index is now at its lowest levels since February 1983. The expectations index increased to 75.6 from 70.3 in the previous month. This is the second straight month that the expectations index has increased and the highest it has been since December 2007.

Final estimates for third quarter gross domestic product showed that the economy was not rebounding as quickly as earlier estimates had suggested. Final estimates were revised lower from both preliminary and advance numbers to record 2.2% growth compared to 2.8% in the previous estimate and 3.5% in the initial estimate. However, this was the first quarter since the second quarter of 2008 that the economy showed expansion. Consumer, business, and government spending were all revised lower in the final third quarter report.

Housing Market
New home sales lost momentum in October while the resale market continued to surge due to lower mortgage rates and the extended homebuyer tax credit. Seasonally-adjusted new home sales fell 11.3% from the previous month to an annual rate of 355,000 units. The seasonally-adjusted annual rate of new home sales in November is back down to its lowest levels since April. New home sales for the previous three months were also revised lower by 49,000 units. It is worrisome that lower rates and the extended housing tax credit were not enough to fuel demand for new homes in November.

While the new home affordability ratio remains at very high levels, it is still almost 10 percentage points higher than the existing home ratio. Median new home prices in November rose to $217,400 from a downwardly amount of $209,400 in October. Prices increased 3.8% from the previous month but are still 1.9% lower than they were this time last year. Median new home prices have now recorded 11 straight months of year-over-year declines. Further price cuts and use of incentives may be necessary to attract demand in the new homes market. However, the continued reduction in inventory levels is a positive sign for stabilization in the new homes market. In November, new home inventories declined to 234,00 units from an October figure of 241,000 on a non-seasonally adjusted basis. Seasonally-adjusted inventory of unsold homes have declined for 31 straight months to 235,000 units.

Sales in the existing home market remained strong in November. The seasonally-adjusted annual rate of all existing homes jumped 7.4% from October levels to 6,540,000 units. This is the highest the seasonally-adjusted annual rate of existing home sales since February 2007. Existing single-family home sales increased 8.5% from last month while condo and co-op sales remained flat from October levels at 770,000 units. Lower mortgage rates and the extended housing tax credit have kept buyers interested due to all-time high affordability.

In November, the median sales price for an existing home increased slightly to $172,600 from $172,200 in October. This was the first gain in median existing home prices since June although prices are still 4.3% lower than they were this time last year. Existing home inventory posted declines for the fourth consecutive month in November, easing 1.3% to 3,518,000 units from a revised 3,565,000 units in October. This is the lowest level of existing home inventory on the market since December 2006.

After rising for nine consecutive months, the National Association of Realtor’s pending home sales index in November fell for the first time since January. The Pending Home sales Index, which is a forward-looking indicator based on contracts signed in November, dropped 16.0% to a reading of 96.0 from an upwardly revised reading of 114.3 in October.

National average mortgage rates declined from the previous week to 5.09% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on January 7th. This was the first weekly decline for average fixed rates since the beginning of December. Rates had been steadily moving higher and increased for four straight weeks before this past week’s decline. In the week ending January 1st, the MBA’s seasonally-adjusted purchase index increased 3.6% from the previous week but was still down 36.33% compared to the same time last year. This was the first weekly gain for the purchase index in the past month while the year-over-year drop in the purchase index is the largest since February 2009.

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